External the principal and interest payments on a

External
sources of debt

Multinational
corporation’s capital is made up of debt and equity. There are various channels
how multinational corporation can access to debt over domestic bond offering,
global bond offering, private placement of bonds and loans from financial
institutions.

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Firstly, when multinational corporations used
domestic bond offering as source of debt they take part in offering in their
country of origin in which the funds are denominated in their local currency.
Besides this, multinational corporations can engage in global bond offering, in
which they at the same time sell bonds denominated in the currencies of
numerous countries. Furthermore, private placement of bonds is another source
of debt in which multinational corporations propose a private placement of
bonds to financial institutions in their home country of origin or in the host
country where they are expanding. Also, multinational corporation’s parent frequently
borrows funds from the financial institutions.

According
to The Balance (Scott, 2017) there
are three advantages to debt financing: maintain ownership, tax deductions and
lower interest rate. Even in situations when multinational corporation borrows
money from the bank or another lender MNCs maintain ownership and keep full
right to run business as they choose without external interventions. Scott (2017) believes that tax deductions
make debt financing more desirable as the principal and interest payments on a
business loans are classified as business expense, and can be subtracted from
business’s income at tax time. Tax
deductions also open opportunities of lower bank interest rates. On the other side The Balance (Scott, 2017) state four points as the disadvantage of
debt financing: repayment, high rate, impact on credit rating, cash and
collateral. It is important to note that when money is borrowed form lender MNC
has obligation to make regular payments even financial condition of corporation
is not good. In cases when corporation is declaring bankruptcy lenders will
have right of repayment before any equity investor.

Interest rates are variable and they fluctuate
from the macroeconomic conditions, corporations credit history with the
financial institutions, corporation’s business credit rating and personal
credit history. Levering up might me desirable for strategical investment in
new equipment and technology, however, it is important to point out that each
loan will be recorded in corporation’s credit report and will eventually affect
credit rating.

Even
tough multinational corporations make big investments in technology, research
and development and in some cases are stronger than some national economies
there is a fact that noting is guaranteed and that economy is rapidly changing.
Thus, the higher the risk becomes to the financial institutions they will pose
higher interest rates to borrowers on each subsequent loan.

During
the loan request and processing MNCs prepare business plan in which they
present how they are going to invest borrowed money and ensure lender that they
will generate a sufficient cash flow by the maturity of the loan. At the last,
lender will request to provide collateral to protect the lender in the event
that corporation goes default on payments.

According
to Kunigis (2018) advantages of equity financing: less burden, credit issues
gone, learn and gain from partners. Equity financing is more suitable for the
growing businesses as there is no obligation of making regular payment to
lender so more funds may be directed to business development. For multinational
corporations that have poor credit history or lack of track of financial record
equity financing is more desirable source of financing. Equity financing provides opportunities of
forming partnerships where MNC may benefit from cultural diversity, business
network and know-how.

On the other side disadvantages of equity financing are: share profit,
loss of control and potential conflict. Kunigis (2018) believes that investors
will assume portion of corporation’s profit. MNC must assured that they made
worthwhile trade off benefiting from the values, experience and business
understanding of investors. Equity financing assumes decentralization of
control. Shared ownership and team work could lead to tension and conflict in
situations where dissimilarities in aims, management styles and strategies
differ.

One of the most
important decision for multinational corporations is choice capital structure
of corporation. Multinational corporation has to choose which source of
financing is most suitable for its corporate characterises and characteristics
of host country in order to take advantage of new market and its potentials. In
following paragraphs influences of corporate and host country characteristics
will be explained in detail.

Influence of Corporate Characteristics

Corporations with steady cash flows may handle more debt as there is
continuous stream of cash inflows to cover regular interest payments on debt.
Furthermore, corporations with good credit history have no risk for financial
institutions and have more access to loans. Equity intensive capital structure
is mostly used by highly profitable multinational corporations that are able to
finance most of their investments through retained earnings. Moreover,
multinational corporations benefit of their structure in situation when they
have to back their debt. It is always easier for MNC to back the debt of
subsidiary to increase the borrowing capacity then regular company. Nevertheless, structure of multinational organisation
has many benefits there some issues that arise due to its structure such as
agency problem. Multinational corporation cannot be easily monitored by
investors from the parent country accordingly agency costs are high. In order
to get better insight on their financial position investors request external
audit report on group level that consists of consolidated financial statement.
Consolidated financial statement gives investors insight of their financial
position and gives them chance to make new3 internal restructuring in
corporation and develop new strategies for global market.

Influence of Host Country Characteristics

Multinational corporations may benefit form changes of interest rates in
different host countries, some countries may have lower interest rates and cost
of taking loan will be significantly lower in comparison to country of origin.

Besides this,
multinational corporations may benefit form fluctuations of currencies in
various markets. If depreciation of currency is expected in subsidiaries’ host
country MNC may borrow in that currency rather than rely on parent financing.
When
subsidiary’s local currency appreciates, then the subsidiary may retain
and reinvest its earnings.

In the last century political scene in almost all countries was
turbulent varying form one political system to another. Political risk is also
present nowadays and it directly influences of multinational corporation’s
choice of source of financing. In scene where MNC is exposed to the risk of
confiscation of its assets, the subsidiary may use prefer to use debt
financing.